For years, cryptocurrency has been the hottest topic in the investment and finance sphere. And while 2021 has been the era-defining year for the crypto world, the start of 2022 for the market was anything but euphoric.
However, in spite of its well-known volatility, cryptocurrency is on fire, and many investors are seeking to profit from its rise.
While experienced traders have been trading crypto for years, how do you get started in the market if you’re new to it? Are there any rules you need to follow as an ambitious crypto investor? And is the crypto market even worth your investment?
Let’s take a deeper dive.
What is Crypto Investment?
Cryptocurrency, often called digital money, uses blockchain technology to establish distributed consensus, which is considered secure even between unreliable parties. Cryptocurrency blockchains are similar to traditional bookkeepers’ ledgers, except they’re electronic, so anyone who has access to the ledger can also be a bookkeeper.
Cryptocurrency is one of the newest and most exciting asset classes for investors and has attracted investors worldwide.
But, as with every investment, this hyper-growing market is not without rules. So, here are the top seven crypto investment rules investors must follow:
Top 7 Crypto Investment Rules
Trading and investing in volatile assets as cryptocurrency requires many high-end skills. Selecting the right investment strategies and mastering the fundamental and technical analysis to understand the vast world of digital currencies requires practice with a learning curve.
Though the trajectory of growth in this immensely complicated industry comes with conditioning, one must be conscious of a few sets of rules.
Therefore, before setting off as an investor in the crypto universe, here are the top 7 crypto investment rules to keep in mind:
First rule for Crypto Investment: Fundamental Analysis
By using a fundamental analysis (FA), an investor can determine the value of an asset or business based on its intrinsic value. Its main objective is to determine whether a company or asset is overvalued or undervalued by considering a number of internal and external factors. This information can then be leveraged to enter or exit positions strategically.
The cryptocurrency market is notoriously volatile. Even established currencies like Ethereum and Bitcoin are prone to sudden fluctuations. Furthermore, there are many risks involved when investing in new coins and tokens unless you know what you’re getting into.
The fundamental analysis makes it possible for seasoned traders and non-technical investors to trade confidently. Moreover, with the help of basic research, traders can create informed strategies with a better chance at profitability.
While conducting fundamental analysis, there are a number of a wide array of factors to consider. However, the analysis can be broken down into three major categories:
Financial Metrics
Using fundamental analysis, an investor can determine the prospects of an asset by producing a quantitative value. A crypto financial assessment involves understanding the trading conditions of assets, including their surroundings, liquidity, and market response.
These factors make fundamental crypto analysis valuable, especially before formulating an investment strategy.
The pillars of financial metric analysis include the study of:
Project Metrics
A cryptocurrency’s performance is evaluated using project metrics, a qualitative approach. They examine both internal and external variables, such as the purpose and operation of the cryptocurrency project.
Analysing project metrics include examining:
- Background analysis
- Crypto white papers
- Tekenomics and utility
- Competitor comparison
- Product map
External Factors
When investors consider the factors that can be measured numerically, quantitative analysis is a great way to overview the financial metrics. It, however, does not capture the company’s unmeasurable aspects or risks.
This is especially true for crypto, a market with many external factors to consider. However, user behaviour, analytical tools, and social politics can greatly influence an asset’s business fundamentals.
Second rule for Crypto Investment: Technical Analysis
Many cryptocurrency traders find technical analysis a useful tool for understanding the ebbs and flows of the market.
Unfortunately, technical analysis cannot be deterministic. Based on historical data analysed through charts, the theory does not predict what will happen exactly but rather what is likely to happen based on what is known. However, implementing it effectively requires accuracy, which is the tricky part.
The purpose of technical analysis is to study price movements using charts. TA lets traders make money from price changes, regardless of whether a cryptocurrency goes up or down.
The assumptions behind TA include the following:
- A cryptocurrency price reflects almost all information.
- People’s psychological inclinations tend to repeat themselves over time.
- Statistics can be useful in forecasting price movements.
However, Technical Analysis isn’t for everyone!
The YouTube video below from Coin Bureou explains the concept of technical analysis in depth:
Third rule for Crypto Investment: Watch for Volatility
A cryptocurrency’s price is as volatile as one asset can get. Even a misguided rumour could cause them to drop in seconds.
For sophisticated investors, understanding the market’s fundamentals, what the trends are, and where the market is heading can be a valuable tool. However, it’s a minefield for new investors in the absence of these skills or high-powered algorithms that handle these trades.
High-powered Wall Street traders are playing the volatility game to outsmart another big-money investor. But, in this race, the new investors can easily lose a lot of money if the market gets volatile.
It’s because volatility terrifies beginners, especially new traders. Meanwhile, other traders may pounce and buy at low prices.
In a nutshell, volatility helps sophisticated traders and inexperienced investors make money by “buying low and selling high.”
Fourth rule for Crypto Investment: Diversify your portfolio
Diversifying your cryptocurrency portfolio involves investing your money in various crypto projects to reduce your risks if any of the projects fail. By diversifying your portfolio, you can also achieve the best possible return even when some investment items underperform.
The primary reasons behind the diversification of crypto investment portfolios being the thumb rule in the digital currency world are:
- The cryptocurrency market is highly volatile. Investment diversification helps keep market swings’ effect on your investment to a minimum.
- Due to sudden price spikes.
- Ultimately, it increases the likelihood of your cryptocurrency investments’ prosperity.
- You can’t rely on a single cryptocurrency, such as Bitcoin, to provide good returns.
- It allows you to maximise the performance of multiple coins simultaneously.
Investing in two or three cryptocurrencies may be your best option if you are a small investor. Nevertheless, you will not be able to build a substantial portfolio with just two or three coins. Therefore, you need to add more cryptos to your portfolio as your knowledge and understanding of the market evolves.
Below are some of the best strategies to diversify your portfolio:
- Diversify by the type of cryptocurrencies
- Diversify by industry
- Diversify by timing
- Diversify by geography
Diversification is a great way for investors to manage crypto and traditional assets risk. Despite not protecting you from market-wide corrections or bearish cycles, a diversified investment portfolio will reduce your risk if one or more of your portfolio coins exits the crypto market or has a poor run.
Fifth rule for Crypto Investment: Analyse your mistakes
As a cryptocurrency investor, you will make mistakes. But, how you act upon those mistakes will define your future growth. Therefore, it is important to analyse every investment you make.
Some of the common crypto investment mistakes include:
Not researching before investing
People mistake investing in cryptocurrencies based on hype, trends, and recommendations from their best friend’s brother’s uncle.
However, the key to investing has a strategy, and you must have one when analysing cryptocurrencies so that you don’t buy into a pump-and-dump or a rug pull.
Not Securing Your Investment Properly
An important aspect to consider when investing in cryptocurrencies is security.
Several reputable exchanges, including Binance, Coinbase, Kraken, Crypto, and others, are not recommended as your crypto wallet. Instead, use a wallet protecting your investment and data, such as Trezor or Ledger.
Short-Term Strategizing
As a crypto investor, you always want to study the long-term viability of a digital currency, primarily because of the immature and volatile nature of the market. This hyper-growing market is unpredictable and nascent, with new coins and technology constantly being tested and introduced.
Therefore, a long-term approach will help you reap maximum returns.
Sixth rule for Crypto Investment: avoid emotional trading
In a volatile market like cryptocurrency, it’s easy to fall into the trap of making rash, emotional decisions – but don’t make this rookie mistake!
Think logically and avoid making emotional decisions! Creating an investment checklist is a great way to help you make sure you invest only in coins that fit your criteria.
Here are some important questions to ask yourself before making any cryptocurrency investments:
- Have they got a strong leadership team?
- Do they have a development team working on new updates?
- Have you read the white paper they published?
- Have they built a solid brand and marketing team?
- Are they ambitious companies with reliable long-term goals?
The more fundamental your investment strategy is, the more likely you are to make better long-term investments – and creating a checklist is an effective way to accomplish that.
Seventh rule for Crypto Investment: build a decision-making model for your investments
The world of cryptocurrencies offers a wide range of sources of information. As an investor, it allows you to consult a vast amount of information before making an investment decision.
Having too much information may seem like an advantage, but it can interfere with your decision-making process in some cases.
You may be forced to constantly synthesise too many contradictory sources of information, which can slow you down. Therefore, you need to be trained in the technical analysis of cryptocurrencies, both Bitcoins and altcoins.
Having this information at your fingertips will enable you to make a more informed decision about when to back up your position. When you have had training in technical analysis, you will need to select a few relevant sources of information and stick to them.
By invoking this strategy, you will develop your decision-making process. After it proves its worth in a few exchanges, you can consider sticking with it. However, taking this approach will make decisions in the future easier.
How to Start Crypto Investment?
A wide variety of cryptocurrencies exist on the market with different fundamental values. Investing in cryptocurrencies requires investors to be aware that they could disappear one day and return the next, making your investment useless. Thus, managing your risks and developing a strategy are crucial to successful investing in cryptocurrencies.
For cryptocurrency beginners, a platform’s transaction fees, types of cryptocurrencies available on the platform, and education resources must be considered, along with other features that align with their interests and investment goals.
Cryptocurrency exchanges are plentiful. TradeStation, Coinbase, eToro, and Gemini are just a few of many platforms that make cryptocurrency ownership and transactions easy, accessible, and secure.
Be mindful of how cryptocurrency will fit into your portfolio. As for investing in crypto, it’s best to maintain a conservative approach to crypto investing, allocating between 2% and 5% to this sector in your portfolio owing to its volatility.
According to experts, when it comes to diversifying into cryptocurrency, it remains one of the least correlated assets, meaning it is an effective hedge against stocks and bonds.
Furthermore, in light of the fact that bond yields do not keep up with inflation, cryptocurrencies can serve as alternative inflation hedges.
Wrapping Up
The year 2021 was the year of crypto supremacy, and 2022 will be the defining year for crypto resilience. However, as an investor, you must focus on building your knowledge throughout the year. Additionally, introducing platforms like CoinSwitch Kuber will provide insights, trading tools, risk analysis, and more.
Irrespective of price fluctuations, digital assets will be hot in 2022. Furthermore, the age-old adage, ‘The trend is your friend,’ still applies to investors.